It’s AER
How does the 3% rate work?
This is a 3% annual equivalent rate (AER) which is paid to you on a monthly basis. You can put it toward your next investment, reduce the cost of your membership, or withdraw it anytime and have lunch on us.
I believe this does include compounding. Incidentally I rarely have the max balance in, I tend to buy stocks with it 
I don’t think you can assume most people keep £4K in their account at all time just to max the interest